Yields rose to their highest in more than three weeks after Reserve Bank of India deputy governor Shyamala Gopinath said higher food prices may spillover to the broader economy and future policy actions will be dictated by evolving inflation and growth conditions. The RBI may raise its reverse repurchase rate from a record-low 3.25%, according to Sanjay Arya, treasurer at state-owned Bank of Maharashtra.
We are quite near monetary tightening now, Mumbai-based Arya said. Although food-price inflation is due to short supplies, liquidity control will have a symbolic effect in reducing speculation in the commodities market.
Meanwhile, rupee dropped on speculation importers bought dollars to meet month-end payments.
Costlier crude oil is forcing refiners to obtain more US currency in the foreign-exchange market. The price of the fuel has jumped 76% this year in New York as the recovery from a global recession boosted demand. India, Asias third-largest economy, gets more than 70% of the crude it needs from abroad. The rupee also fell as signs of an economic recovery in the US increased demand for dollars.
Dollar demand has strengthened from importers after the recent holiday, said Naveen Raghuvanshi, a currency trader at Development Credit Bank. I expect the rupee to be under pressure.